Webb-site reveals the Hong Kong Budget Speech which should be delivered next Wednesday.

The alternative Budget Speech, 2013: Prosperity through Reform22 February 2013

This is the Hong Kong Budget Speech
that should be given next Wednesday, 27-Feb-2013, but won't.

Mr President,

I move that the Appropriation Bill 2013 be read a second time.

Introduction

Having regard to our substantial
reserves of
some $1341bn at the end of 2012 (including the
accumulated $624bn surplus in the Exchange Fund) and to the long-run average surpluses which have led to the accumulation of these reserves, there is ample
scope to reduce revenues while continuing to enhance social services, including
education, healthcare and welfare. Rather than engage in sporadic, untargeted
and unpredictable hand-outs, we will abolish economically inefficient taxes,
reform and reduce other taxes, and remove wasteful programmes.

We will return to the free market principles on which Hong Kong built its
economic success, by withdrawing the Government from commercial activities in
the economy, and removing direct and hidden subsidies to commercial enterprises.

We will reform the tax system so that revenue is collected fairly from gross
domestic product (GDP), the economic output of HK, wherever possible simplifying the
system and removing distortions of incentives. For individuals, economic gain is
their earnings (whether in cash or benefits) minus a personal allowance for
expenses, and for businesses, economic gain is their profits.

Finally, we will comply with
Basic Law Article 107, which requires HK to "strive to achieve a fiscal
balance, avoid deficits and keep the budget commensurate with the growth rate of
its gross domestic product". By requiring fiscal balance, BL 107 indeed requires
that we return surpluses, net of deficits, to the economy, rather than piling up
reserves as HK has done in the past. We will do this with adjustments to tax
rates rather than unpredictable handouts, waivers and subsidies. Welfare will be
appropriately funded but not subject to random redistributive handouts.

The last requirement of BL 107, to keep budget growth in line with GDP, is
important, because it implies that in the long run, Government expenditure and
revenues should be a constant share of GDP, not an increasing share of GDP. In
1997-98,
budgeted public expenditure was 18.3% of GDP, but this has been creeping up
and by 2012-13 it was
budgeted at 21.4% with a decline to 19.2% after 4 years. In other words, for
every $100 of economic output, the Government now accounts for $3 more of it
than it did at the time of the Handover.

We shall aim to keep this figure at or below 20% in the long run, and
shall not spend just for the sake of it. In particular, we will stop
over-stimulating the construction sector with projects which do not generate an
economic rate of return. Hong Kong has undergone a vast development since World
War II, but we are now entering the era of in-filling, replacement and upgrading
rather than rampant expansion. The road to economic hell is paved with concrete,
not good intentions.

Abolishing stamp duty

Stamp duty, currently charged on real estate and HK-registered shares, is an archaic tax dating from the time of King William III of
Orange and Queen Mary II, introduced in England in 1694 to finance a war against
France. It has no place in a modern economy, because it taxes the value and
frequency of transfer of
certain assets rather than the corporate or personal productivity that make up our
GDP. Slapping
ever-increasing levels of stamp duty on transactions makes properties less
affordable, and grabs a bigger slice of the value from each transaction, slowing
down turnover and impeding freedom of choice.

Potential vendors have already paid their stamp duty when they bought.
Their property is theoretically worth the net present value (NPV)
of all future net income from it. They have a choice between occupying, or
equivalently, collecting rental income, or selling, so they will be reluctant to
reduce their asking price for sale relative to a given NPV of rentals.
Similarly, potential buyers can either carry on renting or pay up the stamp duty
in order to secure the future rental income stream (or the avoidance of rent by
occupying), so they will be reluctant to pay a lot more than the NPV. The higher
the transaction costs, the longer the expected holding period needs to be to
justify the levy.

A simple thought experiment shows that if we jacked up regular stamp duty to
1000% then almost nobody would ever sell again, and almost nobody would buy -
they would just rent from those who own, to prevent the Government grabbing most
of the value as transaction costs. The calculus at lower rates is similar.
Higher rates of stamp duty reduced turnover, but they don't affect the NPV.

An example will help you to understand why. Suppose an office property is
transacted at $6m plus 3% stamp duty, or a duty of
$180,000, then this equivalent to a property with a theoretical value of $6.09m
on which each side pays "brokerage" of $90,000 (about 1.48%) to the Government.
The buyer pays a total of $6.18m, and the seller receives $6.00m. If we double
stamp duty to 6% but still split the costs, assuming the NPV stays the same at
$6.09m as it should, then the transacted price would shift to
$6.09m/1.03=$5,912,621. The buyer would pay $6,267,379 including stamp duty, and
each side would be paying about $177,378 in "brokerage" to the Government, or
2.91% of the market value. Yes, there is a reduction in the transacted price,
but in reality all it does is to deter both buyers and sellers due to the higher
costs. The seller receives less, but the buyer pays more, so the price drop is
illusory. The higher the duty, the fewer people would be willing to buy or sell.

Here's what happens if you increase the stamp duty in multiples of 3%:

This will remove friction from the economy which keeps people locked in
their homes (rather than moving homes and paying duty again) and slows down
turnover of shares, while driving people into riskier derivatives that do not
bear stamp duty. Revenue from stamp duty has
increased from $7.3bn in 2002-3 to $44.4bn in 2011-12. This is a major drag
on GDP.

We will also abolish Special Stamp Duty and withdraw the proposed Buyer's
Stamp Duty, as both are unconstitutional
penalties on the exercise of rights contained in Basic Law 105,
as well as having numerous undesirable consequences and unintended victims.
However, if people are trading in properties as a business, whether or not they
are incorporated, that business will remain
subject to profits tax. I will return to housing and land policy later in this
speech.

Flattening salaries tax

Currently, an individual has a personal allowance of
$120k per year and is then subject to salaries tax at 2% on the next $40k, 7% on the next $40k,
12% on the next $40k and 17% thereafter, subject to a maximum overall charge of
15% on pay before allowances (known as the "Standard
Rate"). So the first $240k produces tax of just $8,400, or
3.5% of earnings. It is hardly worth it. Above $240k, the rate is 17% until it
drops to 15% at $1620k, which is the breakeven point for the Standard Rate. To
simplify this and make it fairer, without charging anyone more, we will:

raise the personal allowance from $120k to $200k

abolish the 2%, 7% and 12% bands

adopt a flat rate of tax for all earned income above $200k at
14%.

For a given amount of earnings, everyone will pay less tax. Those earning
between $120k and $200k will be removed from the tax net, and those earning
between $200k and $240k will see their tax bill at least one third lower. Those
earning between $240k and $1620k will get a 3% reduction on that band, from 17%
to 14%, while those earning more than the $1620k breakeven point will only get a
1% reduction plus the $28k from no longer taxing their personal allowance.

As noted below, we will tax benefits, including housing, at their real value,
and we will abolish the home loan interest deduction, which will at least
partially offset the revenue reduction. We will review the new flat rate of tax
in the light of actual revenues.

Profits tax

Profits tax will be reduced from 16.5% to 14%, the same rate as salaries tax. This
will remove the incentive for business owners to pay out all their profits as
director's bonus. They will still enjoy salaries tax allowances if they
incorporate and pay themselves at least $200k, but above that, there will be no
difference in the tax treatment of salaries and profits.

We will no longer indulge in profits tax waivers. Companies which organise
themselves into multiple subsidiaries, for example, a retailer holding company
with 1 shop per subsidiary, have been able to claim last year's
$12,000 waiver multiple times. This is not an efficient use of public money.
Instead, if revenues are consistently above budget on a 5-year average, then we
will lower the flat rate of salaries tax and profits tax to compensate.

Couple's allowance

Allowances for the cost of raising
children and supporting relatives will be the same as before. However, in a
modern society, we must recognise that many couples choose to share their home,
their lives and their income without getting married, and in some cases marriage
is not an option because our law does not yet recognise same-sex marriage.
Unmarried but cohabiting couples, heterosexual or homosexual, should be allowed
to share their personal tax allowances. Therefore married person's allowance
will be replaced with a "Couple's Allowance" of the same value, being twice the
single allowance. To claim it, a couple must share the same residential address
and either be married or not closely related - i.e. not linearly related or
siblings.

It should be noted that, with the new flat tax rate, there will be no
advantage in claiming couple's allowance unless one of the two is earning less
than the tax threshold of $200k per year.

Taxing non-cash benefits

We will abolish the loophole of favourable treatment of rental reimbursements
or housing provided by the employer. This is currently valued at 10% of your
cash salary; instead, we will value it at its actual cost or the rateable value
of the premises, whichever is greater. This formula allows for the possibility
that quarters are subsidised or provided free. If you receive free electricity
as a director of a power company, or other perks not convertible into cash,
these will also be taxed at actual value. The fundamental principle is that you
will be taxed on the fair value of what you are paid, not how
you are paid.

Abolishing mortgage interest deduction

We will abolish the specific salaries tax deduction for interest on home
loans. The deduction distorts the incentives being buying and renting, and in
effect is a gradual return of the stamp duty we were previously charging, but
only if the buyer borrows to finance his purchase, so it is also a distortion of
the incentives in financing choices. However, we will be raising personal
allowances as mentioned below, so this will counter the effect of abolition.

Roads and air pollution

We will abolish First Registration Tax, because vehicle ownership doesn't
cause pollution or congestion. Driving them does. If you want to buy a beautiful car
and just look at it in your car park, then you won't be taxed for that. You
could just as easily buy a painting and look at it. For the
same reason, we will abolish annual vehicle licence fees and replace them with a
simple administrative fee to cover the cost of verifying that the vehicle has a
road-worthiness certificate if required. Annual emissions tests will be
mandatory. However, we will increase taxes on
vehicle usage as explained below.

Diesel engines are an ongoing source of particulate air pollution, and
yet we charge zero diesel duty and $6.06 per litre on Petrol. This is
inconsistent with the associated healthcare costs and damage to the environment,
as well as the cost of land allocated to roads and road maintenance costs. It is
a hidden subsidy to the transport trade. Roads in general are underpriced,
resulting in congestion. With
immediate effect, duty on both diesel and petrol will be raised to $8.88 per
litre, without exemptions.

LPG doesn't produce as much NOx or particulates, but still generates CO2
and an LPG vehicle still incurs road costs. LPG duty will be introduced at $4.88
per litre, without exemptions. This will remove the hidden subsidy to taxis and
minibuses. We will permit the licensing of private cars powered by LPG, as fuel
source should be a matter of free choice, and we wish to encourage less
polluting fuel usage.

We will also introduce electronic road pricing in all congested areas, which
will be smart enough not to charge when traffic is low and to
charge more during peak hours, so as to keep the traffic moving at not less than a target
speed. Shops and distributors should reschedule deliveries if they wish to
reduce or avoid the charge.

Metered parking is currently very underpriced, and that represents unfair
competition with private sector car parks, as well as using up valuable road
space in some areas. We will raise parking meter charges from $2 per 15 minutes to $6 per 15
minutes in urban areas and $5 in rural areas, and thereafter keep it in line
with private-sector car park charges, currently around $24/20 per hour. Wherever
on-street parking is an impediment to traffic, those spaces will be removed,
because the income from meters is not worth the economic cost of traffic jams.

Fixed penalties for illegal parking have not been raised since 1994. The fine
for dropping a sweet wrapper in a public place is $1500, but illegal parking
only costs $320, which many consider good value if you only get caught once in
10 hours. So we will raise the fine to $1500 for a first offence in any 12-month
period, and $3000 for a second or subsequent offence. A third offence will also
incur licence points for the responsible driver. To increase transparency, full
names and ID numbers of offenders will be published. Your ID number is an
identifier, not a password.

The overall effect of these measures will be to increase revenues from fuel
duties, parking and electronic road pricing, while eliminating revenue from
first registration tax and annual license fees. The aim is to increase overall
revenues from road transport, thereby deterring road usage and air pollution
overall.

Taxis

We never promised not to issue more taxi licenses, and these were never
intended as an investment but as a system for ensuring that fares are properly
metered and safety standards are met. The current system is anti-competitive,
because in order to drive a taxi for a living, you have to pay someone else not
to, by buying or renting an existing license. Indeed, most drivers currently pay
rent to a relatively small group of people who own the
licenses. When fares go up, the value mainly accrues to the license owners, not
the drivers, because the economic value-added of a driver remains the same. He
will only drive if he can make roughly what he would earn on any alternative
minimum-wage job.

We
currently have some
18,138 licensed taxis, comprising 15,250 urban (red), 2,838 rural (green) and 50
Lantau (blue). Red and green taxi licenses
change hands at about
$7m and $5m respectively, valuing the stock at around HK$121bn. If you have been
betting on this ridiculous situation continuing, then you have just lost the
bet. Taxi licenses are not a license to print money.

We will henceforth allow anyone with a
clean driving licence and roadworthy taxi to obtain a non-transferable taxi
license for an administrative charge of $100 per year. However, those
considering applying should note that taxis will be subject to congestion
charges each time they enter a given zone, and they will be charged fuel duty on
LPG, to
cover air pollution and general road usage, so operating costs will be higher
than before. These costs will reduce the rental that drivers can afford
to pay to taxi owners, while drivers' net income will be largely unaffected,
remaining close to minimum wage levels for a relatively unskilled job.

Buses

We will introduce a more rational system for buses. In congested areas,
"landing slots" at bus stops will be created and re-tendered every 3
years, to reduce
the problem of buses queuing up and blocking traffic flow to drop or pick-up passengers. Like other
vehicles, buses will have to pay congestion charges (at twice the rate for a car
and the same as a truck) and will not be exempt from fuel duty as they are at
present, but since the cost will be spread amongst all passengers, this will
have minimal impact on fares if buses are well-loaded. It will incentivise bus companies to use
interchange hubs and not to run so many low-load buses through congested areas
at peak times.

We will also allow open competition. Franchises will be abolished, and bus
companies will be free to choose what routes to run and how much to charge, subject only to advanced publication of tariffs
and routes, which may include
different charges at different times of day. They will set prices that they are
willing to accept and which passengers are willing to pay, just as red
mini-buses do. The Chief Executive of HK will no longer set bus fares. That's
not his job, and it is a thankless task.

Since franchises will be scrapped, it follows that we will remove the
unofficial cap of 7071 on the number of non-franchised buses (NFBs). A
premium for their licenses has already begun to develop, and we do not want them
to end up like taxi licenses. They will, like other traffic, have to pay fuel
duties and congestion charges. This should relieve the current pressure on
school bus costs due to the increased demand on NFBs from tourism, and will
allow more children to take a school bus rather than be driven to school in a
car or taxi. This will reduce road congestion overall.

The $2 elderly fare scheme

This scheme is an example of wasteful expenditure. We will abolish it, and
instead increase elderly CSSA levels to cover the increased cost of personal transport
for those who cannot afford it. This will target the subsidy where it is needed, rather than
subsidising the transport costs of those who can afford it.

Housing and Land

The Government has a duty to ensure that its citizens have a basic
livelihood, including housing, education, healthcare and sufficient income for a
basic standard of living. The "housing" part of that is to ensure that people
have a home, not that they own
one. No person should be homeless. We will step up the public rental housing
scheme and the building of old-age homes to ensure that, rather than the current
3-year waiting list, there is sufficient inventory that anyone who qualifies
gets a home - in other words, a zero waiting list. This is in line with the
principal of "no rationing through queuing".

You can have a public apartment for as long as you live and cannot afford
private rentals, but we will not subsidize private home ownership. That is not a
good use of public resources. It amounts to a subsidy to invest in property, and
we don't subsidise other kinds of personal investments, such as stocks and
bonds. We accept that some citizens will never achieve
the earning capacity to save enough equity to own a home. Excessive home
ownership targets in the West, and preferential tax treatment for the home as an
asset, has led to housing crashes, a financial meltdown, and waves of
foreclosures against people who could not afford to own a home in the first
place. We will abolish the Home Ownership Scheme for good.

Speaking of housing crashes, we are due for one. We have taken steps via the
HKMA to limit loan-to-value ratios in mortgages, to ensure as far as possible
that taxpayers are not faced with bailing out the banks when the bubble bursts.
So if you find that you cannot afford the deposit or a mortgage, then the market
is sending you a clear signal: don't buy now. Be patient, and stop blaming
foreign buyers for your plight - the evidence since BSD was proposed is clear
that prices have continued to rise because of the expectation of continued low
interest rates, even when the market is restricted to permanent residents. So
overseas buyers and non-permanent residents were not causing the problem.

Lease conditions on land use

For many decades, the Government has been restricting new leases of land to
be for purposes chosen by the Government. The Government decided whether a piece
of land should be a hotel, or an office/retail block, or residential. In
essence, they were playing FarmVille with the land supply. It was a case of
"Government leads, market builds". More recently, the Government has even been
specifying the apartment size and minimum number of apartments that must be
built on private residential sites.

This central planning does not optimise land usage according to the needs of
the economy, and it also results in years of delay and negotiations over land
premiums when an owner wishes to change the land use from one purpose to
another, such as industrial to residential. It also result in hidden subsidies
to a sector when a piece of land is reserved for one purpose but would have been
more valuable for another purpose. For example, hotel land has been too cheap,
lowering the cost of hotel rooms and attracting low-end tourism. Finally, there
has been an inconsistent approach to plot ratios for different uses - for
example, a hotel or office can have 12 times, when a residential project on the
same site would only be allowed 8 times if it only abuts one street.

Going forward, we will return to a more liberal approach. Land needed for
Government programmes (including public schools, public hospitals, public rental
housing and other community facilities) will remain in Government hands, but for
other uses, we will adopt an "unrestricted use" approach in which the highest
bidder wins and decides what to build, subject to the plot ratio limit on the
land. If in future, an alternative use becomes more economically desirable, then
whoever owns that leasehold will be free to quickly redevelop it without payment
of premium. This will be a "Government supplies, market decides" approach. You
will probably find that developers still tend to cluster their usage, with
clusters of retail or offices, for example, because they create economic
synergies, but our approach will allow a more organic evolution of the city
rather than a rigidly-planned one. If a neighbourhood is crying out for a
supermarket or a clinic, then one will likely be built to satisfy demand.

New land leases

We will continue to increase private sector land supply to offset demand.

Even private sector homes in HK are in fact leasehold interests in Government
Land. We will reform the land revenue system to reduce the capital cost of
ownership, by raising the amount of ground rent on new land leases from 3% of
rateable value to 30% of rateable value. Accordingly land premiums will drop,
and so will the capital cost of ownership, in exchange for the obligation to pay
higher ground rents. This will gradually build up a recurrent revenue stream to
fund our future obligations. The ground rent will fluctuate with rateable value,
as it does now.

Developers and estate agents will be required to make clear in advertising
whether the land leases are on old terms with 3% ground rent, to be known as
"GR3" or the new "GR30" lease, for 30% Ground Rent, or on a fixed ground rent
("GRF"), as very old leases are.

Leases without a right of renewal

Basic Law Article 123 states that where leases of land without a right of
renewal expire after 30-Jun-1997, the HKSAR may formulate its own laws and
policies.

Our new policy will be to offer leases with ground rents at 30% of rateable
value (variable). However, to avoid shocking the market, for the few leases without a right of renewal which
expire in each of the next 9 years, we will phase in the new policy by offering
new leases with ground rents incremented at the rate of
3% per year until they reach 30%. So for example, a lease which expires in
fiscal 2013-2014 will be offered a lease with a ground rent at 6% of rateable
value per year, while one which expires after 31st March 2021 will be offered a
new lease with a ground rent at 30% of rateable value per year. To provide
certainty and improve confidence, new leases will be for 999 years (which was
the policy up until about 1900) rather than the current 50 years.

Longer leases in exchange for commitment to pay higher rent after 2047

The rule of law protects all existing leases, but many leases
(including most in the New Territories granted before 1-Jul-1997) expire on
30-Jun-2047, just over 34 years from now. See
the Webb-site article for a
definitive history of HK land leases. We are prepared now to offer certainty
by locking in a new lease for 999 years, subject to ground rent of 30% of
rateable value commencing on 1-Jul-2047. That way, as long as the rule of law
is respected after 2047, you know what the deal will be regardless of future
changes in Government policy. Leasehold owners will be free to decide whether to
take up this option, but they should know that a future government might
withdraw or change the policy. For those who own shares in a land lease, such as
apartments, we will legislate to allow the existing lease to be exchanged for
the new lease if at least 80% of the owners agree.

The Government will retain powers of compulsory
purchase, subject to fair compensation, where land is needed for public purposes
such as railways or roads. However, now that there is a law in place (the
Land
(Compulsory Sale for Redevelopment) Ordinance) to provide for auctions of
multi-owner buildings upon reaching certain thresholds, there is a free market
mechanism for determining when it is economically sensible to redevelop.
Accordingly, the Government no longer needs to intervene, and the
Urban Renewal
Authority, which has outright compulsory purchase powers and pays more than
the fair value of old apartments, will be shut down.

HKMC

The Hong Kong Mortgage Corporation is engaging in mission-creep on the back
of an implicit government support. The latest example is a
Microfinance
Scheme of personal
loans. This is not Bangladesh. We have a functioning personal loan sector, and
we have a government-run student loan scheme. The
HKMC also represents an intervention in the free market for mortgage insurance.
We will either fully float the HKMC in an IPO, or we will put it into "run-off
mode" in which it stops conducting new business and closes down after
its remaining obligations expire, whichever creates the best value for
taxpayers. We should not wait until it becomes our own Fannie Mae or Freddie Mac
and we have to bail it out.

Other privatisation

The Government should not be intervening in export credit insurance either.
We will either fully dispose of the
Hong Kong Export Credit Insurance
Corporation in an IPO, or close it down and release its capital after its
obligations expire, whichever realises the best value for taxpayers. We will
also sell off the Cyberport, including the shopping mall, hotel and offices, as
either a REIT or in a public auction.

SME funding

We will put an end to the corporate welfare system. The social safety net is for people, not businesses.
We must allow the ecology of capitalism to function through survival of the
fittest businesses using capital obtained at market rates, not subsidised by
taxpayers. This will make our economy stronger allowing the continuous renewal
of the economy by reallocation of resources, including labour and capital, from
failing businesses to viable ones.

So we will shut down all
SME Funding Schemes.
We will immediately stop granting new loans and guarantees. The schemes will end
when outstanding loans and guarantees expire. This will save taxpayers billions
on future loan defaults under the
SME Loan Guarantee Scheme. The previous administration
introduced a scheme, with a $100bn quantum, which
it estimated will cost taxpayers HK$11bn in future defaults (net of guarantee
fees). Propping up businesses whose owners are either unwilling or unable to
find their own capital, and then lose ours, is not the way to foster a vibrant
economy.

Last year, the Government poured HK$1bn of public money into a "Dedicated
Fund on Branding, Upgrading and Domestic Sales", via the Hong Kong
Productivity Council, with up to $0.5m per enterprise. This is nothing but a
distortive subsidy. Businesses should use their own funds for branding,
upgrading and sales to the "domestic" mainland. We will terminate the scheme.

Financial services regulation

We will embark on a project to unify the regulation of financial services
into a single Financial Services Commission (FSC), combining
the service-regulation functions of the SFC, HKMA, Insurance Authority and MPFA.
Anyone who deals with clients will then have a single licensor applying
consistent standards. Meanwhile, the regulation of capital adequacy in banks,
insurers, exchanges and brokers (stocks and futures) will be housed under a new
Capital Adequacy Commission (CAC) tasked with ensuring
financial stability. The HKMA will continue to manage the currency board (peg),
oversee the interbank payments systems and manage the Exchange Fund.

Listing regulation is misplaced as a business of a for-profit listed company
itself, Hong Kong Exchanges and Clearing Ltd. We will move the regulation of
listed companies back to the SFC, which already regulates takeovers, and rename
the combined entity the "Listings and Takeovers Authority". Both the Listing
Rules and the Takeovers Code will be given statutory backing, initially with
civil penalties.

When this transfer is complete, we will repeal the statutory monopoly of the
Stock Exchange of Hong Kong Limited, allowing
competing exchanges to
lower transaction costs and improve services for customers, on a level playing
field, without requiring them to pay fees to HKEx. To avoid market
fragmentation, a consolidated quotation and reporting system will be overseen by
the SFC, with each exchange required to report quotes and transactions to a
consolidated data feed to ensure that brokers achieve best execution for their
clients.

We will also review any obstacles that are preventing development of an
exchange-traded retail bond market. Banks will be required to obtain "best
execution" on bonds as they already do on shares, to avoid them distributing
bonds but then holding clients hostage to a
wide quote. Banks will
then have to compete fairly for deposits against the alternative of buying
corporate and governmental bonds.

I will now turn to three of our most important obligations as a government:
education, healthcare and welfare.

Education

There are too many rigidities in our education system and it is producing
sub-optimal results. We need every student to maximise her potential. The
previous administration introduced vouchers for kindergartens, but the terms
were overly restrictive. We will extend the voucher system to all levels of
schooling, remove the restriction on what schools can charge, and remove the
not-for-profit requirement. Each student will receive a voucher equivalent to
what the Government would spend on a public sector school, and will be free to
spend it either in a public sector school or a private school, and private
sector schools will be free to charge top-up fees.

The English Schools Foundation subsidy will be terminated, as it will also
qualify for the voucher, as will other private schools.

We will conduct a study to review the amount of this voucher to determine
whether we are currently spending enough on public sector education per child.
We will provide additional vouchers for those diagnosed with special educational
needs, including those with learning difficulties, to ensure that schools do not
turn away the more expensive customers and serve them properly.

All schools will be given the freedom to choose what language(s) of
instructions they wish to offer, and will also be free to set their own
admission policies. The market will then discover how much demand there is for
Cantonese, English, Mandarin, bilingual or trilingual instruction, and it will
change according to market demand rather than central planning. Parents will
need to judge what kind of teaching will best benefit their child, depending on
his or her learning abilities. Schools will need to compete to attract students
with vouchers; this will include assessing their teachers to ensure that they
are able to provide good service, and removing or retraining those teachers who
are not performing.

Healthcare

A comprehensive public healthcare system is an essential service, but we must
take steps to make it more sustainable. Those who cannot afford to pay, having
been means-tested for CSSA, will continue to receive healthcare absolutely free.
However, those who can pay should pay more than the $100 per night and token
charges for outpatient services.
We will adjust charges so that each person
co-pays 50% of the first $10,000 of costs per year, and 25% of the next $20,000
per year. For costs beyond that level, usually involving chronic disease or
major operations, there will be no charge, so the maximum will be $10,000 in
co-payments per person per year. This will incentivise healthy living and reduce
abuse of emergency wards as clinics. We will make any such charges tax-deductible,
directly connecting the Hospital Authority to the Inland Revenue Department for
verification purposes.

If you are spending money on private healthcare then you are also saving us
money on treating you. To encourage this self-reliance, we will make medical insurance premiums
tax-deductible.

We will take steps to remove anti-competitive practices from the healthcare
industry and dismantle cartels, including admission of suitably qualified
professionals from appropriate overseas jurisdictions without requiring them to
re-qualify.

Welfare

A compassionate and caring society is a stable society. If we focus our
efforts on genuine need rather than scatter-gun subsidies, then within our
budgetary constraints, we can and must do more for the poor. We will conduct a
comprehensive review of CSSA. The "bad child" letter will be abolished -
children will not need to confirm that they are not supporting their parents.
Applicants will of course still be liable for defrauding the public purse if
they do not disclose all sources of income and assets.

We will stop ignoring homes in the computation of assets for some means
tests. We fundamentally should not be handing out money to people who have
millions of dollars in property when there are those without property or other
assets who struggle to get by. Those who have property can either sell it or get
a reverse mortgage to generate income while still living in the home. We will
eliminate duplicated assessment costs for means-tested benefits by introducing a
single biennial measurement. The data can then be used by all government
services, including public housing and CSSA.

The welfare outlook is not all gloom though. Due to primitive conditions in
our post-WWII economy, 75% of people over 65 today did not progress beyond
primary school, but the retirees of tomorrow will on average be far better
educated and have had higher earnings and savings capacity during their
lifetimes. This is why, even as the elderly population grows, the number of
elderly CSSA cases has actually
flat-lined since 2005 and the percentage of elderly who need support has
been declining.

The Mandatory Provident Fund

The MPF is now widely recognised for having failed in its mission. It forces
those who would have saved anyway to put part of their savings into high-cost
funds, while providing little for those who do not earn enough to save and will
still need social security. Upon retirement, it gives participants a lump sum
which they could blow in one night at Happy Valley. It has enriched fund
management companies and administrators, and thousands of people in HK do
nothing but administer the MPF schemes of everyone else. This is not a
productive use of resources.

We will abolish the MPF and allow workers to withdraw their funds or leave
them where they are. Even after MPF contributions cease, employers will continue
to make provision for Long Service Payment obligations under the Employment
Ordinance, but those entitlements accrued after MPF abolition will not be offset
against the accrued MPF fund.

Liberalising the employment contract

It is the Government's role to provide social security for those who
lose their jobs or retire and in either case do not have the means to support
themselves. Overall, the less we interfere in the private contract between a
willing employer and employee, the higher employment and incomes will be. We
must avoid the temptation to privatise government obligations by statutory
impositions on the employment contract, thereby deterring or distorting
employment choices. We will undo some of the past damage in this area:

We will review whether the
Severance and Long-Service Payment system is fulfilling its objectives,
or whether in reality it incentivises employers to lay off staff before they
reach the 5-year entitlement date for LSP. There may be a case for
terminating the LSP scheme for new contracts and instead allowing people to
receive their full economic value as they work rather than having part of it
deferred until they retire or are terminated.

Instead of requiring employers to pay for
maternity leave, the Government will pay for it instead, which will
deter employers from quietly choosing male over female candidates of equal
ability. This will also encourage female employees to produce babies without
fear of causing costs to be incurred by their employer. This should boost
the birth rate.

We will also abolish the prescribed
annual leave entitlements which rise based on the length of employment,
and instead prescribe a minimum of 7 days. Those who have already accrued
higher entitlements (up to 14 days after 9 years employment) can keep them,
but for new employment contracts, additional leave should be a matter of
free negotiation. Currently, taking into account about 16 General Holidays
which fall on weekdays, those who have worked for 9 years with a 5-day week
are about 2.9% (about 7/245) less productive than someone of the same
ability who is a new hire. Again, when low-skilled workers are on the same
wage, this incentivises employers to terminate those who have worked longer.

Concluding remarks

Mr President, if we return to the free-market principles upon which Hong Kong
rose to success against the backdrop of a centrally-planned China after 1949,
and if we withdraw from the increasingly interventionist measures of previous
administrations, then the people of Hong Kong can look forward to a brighter,
more dynamic future, with more choice over their lives and more opportunity.
This is a budget for prosperity through reform, and I commend this budget to the
house.